How to prepare for and react to disruptive events

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How to prepare for and react to disruptive events

It is impossible to prevent future crises. But companies can be better prepared: Multilocal sourcing and glocalization are key to establish proactive procurement.

Putin’s attack on Ukraine, the Covid-19 pandemic, climate change, the trade war between the USA and China – the globalized market offers no buffer zone for the consequences of disruptive events. This puts procurement under a tremendous amount of pressure. Its ability to plan ahead for a possible crisis or to act quickly in the midst of a crisis becomes the center of attention. Knowledge of available supply sources, be they local or international, is vital when it comes to ensuring business continuity. A proactive procurement approach can help prepare for crisis events and react to them when they happen.

The consulting firm McKinsey predicts that cross-industry crisis events with months of negative impact on the global flow of goods are likely to occur every three and a half years in the future. At least. As a result, supply chain difficulties and supply bottlenecks will continue to be a problem. Klaus Staubitzer, CPO and Head of Supply Chain at Siemens, echoes that assessment in a blog recently posted on LinkedIn: “Every company has to ask themselves how to prepare for this new normal, in which unexpected events, I am sure, will become the only true constant.”

Internal challenges during disruptive events

Aside from external events, another major issue is home-grown: many companies build their supply chains on the backs of a few key suppliers in key positions, often concentrated in specific geographical regions, such as the automotive supplier hotspot in Wuhan. This is more efficient – but also more prone to error. If one of these key suppliers fails – or if the entire region is affected by a crisis – the supply chain breaks down.

When it comes to the consequences, one need only look at the current shortage of semiconductors. Companies have concentrated their demand for this valuable technical commodity on a few Taiwanese suppliers and these simply could not keep up with global demand. Suddenly, the entire market is a shark tank, with companies from a wide variety of sectors competing for this rare commodity. According to Stan Aronow, VP Distinguished Advisor at Gartner Supply Chain, “Leaders from some of the most advanced global supply chains have shared that, at times, they were caught flat-footed by the lack of buffer in their networks to adapt to the demand swings and supply constraints of recent months.” However, one solution to this problem is multilocal sourcing.

Multilocal sourcing is the key to prepare for disruptive events

The efficiency-driven globalism in procurement of recent years must come to an end. Supply chains have become leaner and leaner and have been stretched to all corners of the world. In the face of numerous crisis events, it is clear that this approach was – and is – economically unsustainable. The susceptibility of supply chains to errors is simply too great in view of the volatile global economy. Interestingly, Aronow  predicted a shift towards multilocal operations as early as 2012 in his key report: “Manufacturers and retailers have long sought ways to balance the trade-off in their supply network designs between global economies of scale and the demand for local responsiveness. Leading companies are reassessing their sourcing and manufacturing networks and rebalancing their supply network strategies in favor of multilocal design, supply and support. More specifically, they are shifting from a centralized model, where these functions support global markets, to a regionalized approach, where capabilities are placed locally, but architected globally.”

React to disruptive events

Following on from this, it is crucial that companies bring their supply chains closer to their production sites again and increase their resilience by splitting their requirements among several suppliers. This shortens supply routes and makes them less dependent on a limited number of suppliers. Furthermore, the shortened supply routes cause less climate damage and can be better adapted to new (local) legislation – for example, in the area of climate protection. Aronow adds: “Beyond the resilience that multilocal networks afford during times of disruption, the need for agility to support volatile local demand and evolving local product and packaging requirements is another driver behind this trend.” With multilocal sourcing, several local suppliers serve the needs of a company. Because this geographical redundancy is the best way to face a volatile world, crisis situations have less impact on the company.

Using traditional procurement methods, finding alternatives in emergency situations and keeping the flow of goods going can take months at best. After all, these alternatives first have to be found and qualified; then they have to build tools, train staff, and go through quality assurance.

The value of glocalization and multilocal sourcing

A reactive response can never beat a proactive procurement approach. Glocalization and multilocal sourcing mean that the demand is divided among multiple suppliers, so they are ready to deliver immediately. Know-how and means of production are already available, and capacities can easily be ramped up. In addition, years of ignoring digitalization in procurement – even today, many supplier searches are still done manually via Google or exhibitor lists at trade fairs – leads to outdated or obsolete supplier lists. Today, about 80 percent of all purchasing decisions are made on the basis of incomplete information. In short, procurement needs better data.

Digital tools and a proactive way of working must therefore also find their way into purchasing teams. No procurement team in this world is designed, or has the capacity, to continuously research and catalog data on every potential supplier on the planet. Companies therefore need to automate using digital tools and continuously collect all supplier and supply chain information available: prices, quality, sustainability, or innovative capacity. With the advantage of this knowledge – this bird’s eye view of the supplier market – they can constantly integrate alternative suppliers and build diversified, local supply chains.

Cost of multilocal supply chains

Of course, multilocal supply chains are, at first glance, more cost-intensive than the traditional model. This is why companies should consider one thing: it is not merely about risk avoidance. By taking a proactive procurement approach and constantly screening the market for new suppliers, and by reducing dependence on a small number of key suppliers, companies can constantly evaluate their supply chains and suppliers, integrate alternatives, and thus adapt their production lines to the latest trends and developments. According to Klaus Staubitzer, “While going local for global or global for local, the resilience factor will only be able to realize its full potential when you don’t only bet on one horse. Having partner bases instead, which are on a fairly local level and are flexible enough to expand to other realms, will give you a broad field and a balanced position to be in.” Taking this into account, multilocal sourcing doesn’t just mean stability, it equips companies for the ever-changing demands of the global market. After all, the resilience and flexibility of supply chains will ultimately define who wins or loses market share in times of crisis.

Or, as Aronow puts it: “Globalism is dead! Long live multilocalism!”

Scoutbee helps companies to achieve a competitive advantage by creating more – and strategically better – choices of suppliers in much less time than traditional methods.

To find out how Scoutbee can help you and your procurement department, contact us.